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France has
12 high speed train lines, and is planning to build 4
more. Spain has even more. Yet the only high speed line the UK
currently has leads out of the country. Our Prime Minister, without
apparently consulting anyone, has cancelled the more useful part of
our second high speed line to Manchester. As Tom
McTague writes: “The man from Goldman Sachs looked
at the books and made a decision — and we are all supposed to
accept that this is how we are governed.”
In economic terms
the UK is essentially a country of two halves: the South East with
London at its centre, and the rest. Below is a crucial chart taken
from this
post by Tom Forth, showing productivity levels in
Europe’s major cities.
Near the top is
London with other capitals as you might expect, but in the middle we
have the other major cities of France, Germany, Italy, Netherlands
and Belgium. At the bottom are the UK’s major cities. As Forth
shows in his blog, this regional divergence in the UK has steadily
increased over the last two decades, but as some other European
countries show this is far from inevitable.
If you want to know
why the performance of the UK as a whole has declined over the last
decade and a half compared to most other major economies, here is a
place to start. It is a mistake to see ‘levelling-up’ as just a
distributional issue. When most of the country isn’t working very
well, it is not surprising that the country as a whole performs
badly.
A big reason for
this poor performance is poor connectivity. Not just connections to
London, but also connections between cities and between the cities
and surrounding areas. The point of HS2 was not to get from London to
Manchester faster (a very London-centric point of view), but to
create greater capacity for more local passenger trains and freight
on the existing lines. The most useful part of the HS2 project was
not London to Birmingham, but the additional legs from Birmingham,
which are the lines that have been cut.
The excuse Sunak
used for cancelling the Manchester leg of HS2 was that since the
pandemic people were using trains less. Demand had shifted down he
argues, perhaps because more people were working from home or using
zoom for meetings. Yet what evidence is this based on? Here is the
latest quarterly
data for the total number of rail journeys in Great
Britain.
It is true that in
the first quarter of this year total journeys were still less than
pre-pandemic, but the numbers have been steadily rising over the last
few quarters. It is way too soon to declare that there has been a
fundamental shift in rail usage. [1] The suspicion
has to be that the real reason for taking that
decision now is to ‘make room’ for tax cuts before the next
election, where the space they are making room in is a stupid
fiscal rule on
top of unrealistic forecasts.
Evidence that this
was a hasty short term decision to save money rather than any long
term strategic plan comes from the raft of measures assembled to
suggest that ‘every penny of the money saved’ will be spent on
other transport projects for the north. The most embarrassing is that
it included a commitment to establish
a rail link that already exists, but there are plenty
of other contenders for that top spot. That suspicion
also comes from the spin: if No.10 says they are focused on the long
term that means they are doing the opposite and are hoping the spin
will cover that up. Put this together with his various measures to
make it even more difficult for the UK to hit its net zero targets,
and we have a Prime Minister personally taking decisions for the
benefit of his own short term future and to the detriment of the UK
in the longer term.
Cancelling HS2, and
rolling back on net zero, are two vivid examples of a long term UK
problem that has become acute since 2010. The government does not
invest enough, and partly as a result the private sector does not
invest enough. As this
excellent report from the Resolution Foundation’s
Felicia Odamtten & James Smith shows, public and private sector
investment are complements; the former encourages the latter. This
chart from the report shows that UK public investment is consistently
below the international average, and that average includes many
countries that have underinvested over the last two decades like
Germany and the US.
Before the financial
crisis the impact of this lack of public investment on UK economic
growth was masked by other positive factors (e.g. EU membership and
the single market). Pretty much everything the government has done
since 2010 has made this situation worse. Under the Labour government
net public investment (the chart plots gross not net) increased from
0.5% of GDP to 3.0% of GDP, but 2010 austerity involved a sharp cut
back in public investment to 1.5% of GDP. It briefly returned to 3%
of GDP in 2020, but is now declining and is expected to decline
further.
You can see that
lack of public investment pretty well everywhere you look. The impact of this on the economy is
not just about infrastructure like roads and rail. We have an acute
shortage of hospital beds, way below most other OECD countries in per
capita terms, and less equipment like MRI machines than most other
OECD countries. That leads to a less healthy population and therefore
to a reduced and less productive workforce.
But as the
Resolution report also points out, stability in decisions is also
important. Building new infrastructure will encourage private
investment once it’s built, but you would hope (given how long
these things take to do) that the announcement of infrastructure
plans would also encourage private investment (which also can take
some time to create). If you keep changing plans, or overturn the
expectations business has of what governments will do, you increase
doubt and uncertainty which in turn discourages research and
investment. Here lies one of this government’s biggest failures,
and it began in 2010.
Recessions happen,
but the UK experience of the postwar period is that governments would
do what they could to generate strong recoveries from recessions as
quickly as possible. In the UK in particular, it is remarkable how
quickly growth returned to its long term trend after each economic
downturn, and a major reason for that was Keynesian countercyclical
policy (monetary or fiscal). That gave business the confidence to
plan ahead and invest.
Cameron/Osborne
changed all that. With austerity they did the opposite (with monetary
policy largely out of action), and so the recession led to a shift
downward in GDP. There was no recovery for three years, and it was
tepid when it came. From that point on every business knew that their
plans had to allow for future recessions which might also lead to
permanent shifts down in UK output.
The next rug to be
pulled out from the legs of businesses operating in the UK was of
course Brexit. Not only was any business importing or exporting from
or to the EU hit by making it more difficult to trade, but the UK
also lost its attractiveness for any potential foreign direct
investment looking to access the Single Market. Ending free movement
meant that inflation in the UK following the pandemic was worse than
elsewhere, requiring tougher measures from the Bank Of England.
But through all
this, the government kept its commitment to net zero, and to HS2.
Businesses producing greener products (from energy to cars) knew that
there would be an expanding market coming soon for their products.
They could base their business beyond the South East of England,
knowing better communications were on their way. Now, with a stroke
of Spreadsheet Sunak’s pen, this rug has been pulled away too.
Measuring the impact
of policy uncertainty on UK investment and R&D is not easy, but
recently some studies have attempted to do that. [2] They confirm
that greater policy uncertainty reduces both innovation and
investment, and that policy uncertainty has on average been
significantly higher over the last decade and a half than during the
previous decade. Sunak’s decision to end the commitments to HS2 and
net zero in an effort to obtain some political gain just continues a
pattern we have seen since the Conservatives took charge of economic
policy thirteen years ago. Uncertainty generated by this government’s
economic policy changes are an important factor behind the UK’s
relative economic decline over the last fifteen years, and Rishi
Sunak’s administration has turned out to be as bad as his predecessors in this
respect.
[1] The number of
passenger miles travelled has been flat over the last four quarters,
but that is still far too flimsy a foundation for such a major
decision.
[2] The seminal
study is Baker, Bloom and Davis (2016), QJE 2016. Their Economic
Policy Uncertainty index (a more recent version is here)
shows uncertainty stepping up around the Global Financial Crisis
period, and staying higher subsequently.
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